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The process of investing, trading or speculation is an evolutionary process that over time, with enough longevity, helps the investor, trader or speculator achieve superior outcomes. It combines not just the experiences and aspirations of the individual partaking in the activity but also the investment environment they operate in. When I first started investing more than two decades ago, I fancied myself a value investor as many investor starting out on their journeys do. It is an easy right of passage with simple mantras of buy when things are on sale (blood in the streets, tide goes out, etc.) and remain patient waiting for opportunities that will eventually show up.
Over time, value investors inevitably run into value traps, realize the pitfalls of comparative valuation metrics (P/E, EV/EBITDA or my favorite EV/FCF) and for those that venture to determine the “intrinsic value” of a company, debate the use of WACC or a hurdle rate for the discount used in a discounted cash flow analysis (DCF) model. They also start realizing that the majority of short-term market movements are driven by psychology and there is a vast, deep chasm between their intrinsic value and the price quoted on the screen. At times, after the bursting of a bubble, the value investor is vindicated as prices revert to the mean and as is often the case, overshoot the mean. At other times, the value investor is in self doubt wondering if there is something to the weak form of the efficient market hypothesis after all.